Overcome Financial Anxiety – Dealing With Financial Fears

You are not earning the same as before and your savings are all gone. No matter how hardworking you are and no matter how hard you tried to save, you still find yourself in a financial mess. You’ve been receiving notices from your creditors because you haven’t settled your payments until now. Your house mortgage is due by the end of the month and you are not sure how to pay the bill. You have to pay your medical insurance and you have kids going to school. Financial difficulties can bring stress, fear and anxiety to anyone but there are ways to overcome financial anxiety.

All of us suffer from financial stress and anxiety. Financial difficulties are common problems most of us experienced from time to time. The status of the economy and other personal issues like sickness and death in the family can lead to financial woes. Managing financial anxiety is not easy. Although it takes a lot of effort and assistance to overcome financial anxiety, there are solutions to your problems.

Financial stress can affect you physically and psychologically. You will find yourself unable to sleep at night worrying about your bills and finances. It is difficult for you to accomplish anything that needs concentration because your mind is scattered and you simply cannot focus. You become irritable or bad-tempered and restless. The fact is, suffering from financial stress and anxiety can affect your behavior as well as your health and it can make you sick.

How to manage financial anxiety? To overcome financial anxiety, it is important that you are on the best of health. If you are experiencing sleepless nights and high levels of anxiety, you need to see your doctor and make sure you are physically and mentally healthy to face all your problems. Unbearable stress is not an easy thing to handle and there are people who suffered from nervous breakdown when faced with financial problems. So if you feel that you cannot handle the stress on your own, do not hesitate to seek help.

After taking care of your physical and psychological health, it is best to consult a financial adviser or planner to help you overcome financial anxiety. Financial experts can help you realize your options. It is important not to hide your real financial situation. Be honest and disclose how bad your situation is. At first your financial planner may want you to come up with a workable budget. You may need to track and record every single expense to see how much money goes to unimportant things, how much you can trim your budget and how much you can save. It can be very difficult in the beginning but if you want to overcome financial anxiety, you need to cooperate with your financial planner. You and your financial planner will work as a team to accomplish your short-term and long-term financial goals.

Managing financial anxiety is not easy but there is no other way to overcome financial anxiety but to face it. All people have their own financial woes, what sets you apart is how you respond to your problems.

Anxiety is a normal human response to stress but you should not let stress and anxiety control your life. You have the power and the choice to beat stress and overcome financial anxiety. Stress leads to anxiety.

Financial forecasting is one way to predict how well your business will do in the future. You can use financial forecasting to:

– Take an educated guess of how successful a new product launch might be

– Decide whether to take specific financial actions, such as hiring more employees, giving raises, or leasing new office space

– Solicit funding from investors or loans from banks

There are two types of financial forecasting:

Qualitative, which compiles expert advice to make a financial assessment

Quantitative, which looks at financial reports and past performance from your own company and competitors to deliver a fact-based forecast

When Quantitative Forecasting May Not Work

It might seem, at first glance, that quantitative financial forecasting is more accurate. But that isn’t always the case. For instance, if you run a start-up business and don’t have historical data, you won’t be able to make an accurate quantitative forecast. Approximately three years of data is required for accurate financial forecasting.

If you are launching a product or service that is very different from anything your company has done previously, quantitative financial forecasting may not be accurate, either.

Finally, in times of an economic downturn or recession, financial forecasting methods may fall flat. However, using time series decomposition to adjust for trends and seasonality, as well as business cycles, may create more accurate financial forecasting.

Qualitative Forecasting

Qualitative forecasting can be costly, but can provide more accurate results in some cases, including the above or if you are attempting to forecast in rapidly changing fields, like technology, or make forecasts beyond two to three years into the future.

Neither type of financial forecasting is “simple,” but the benefits to your company far outweigh the expenditures. [A financial forecast, even if it’s inaccurate, is still better than having no information at all.

A financial controller can help you choose the right type of financial forecasting, and organize it in such a way that you can get the information you need to make the smartest decisions for the future of your business.

We’ve all heard that old business saw, “You can’t improve what you can’t measure.” Nowhere is this more relevant than when it comes to your company’s bottom line, cash flow and profitability. But how does a small business owner measure these things? And how do you know your measurements are accurate?

The answer lies in having the right business and bookkeeping processes in place, along with the right person to control and manage these processes.

Here are a few steps you can take and processes you can implement to measure, and improve, your company’s profitability.

1 – Maintain up-to-date daily bookkeeping. – Daily bookkeeping ensures that Accounts Receivable invoices go out on time, so you can be paid in a timely manner, and that Accounts Payable are paid in a timely manner to avoid interest charges, late fees or bounced check fees.

When your AP/AR is running like a well-oiled machine, you can save money on interest, late fees and you’ll know you always have enough in the bank to cover expenses as they arise, whether it’s for new office equipment or to cover payroll.

2 – “Close the books” monthly to spot any inaccuracies and ensure up to date financial records. – When your part-time outsourced bookkeeper balances and closes the books, you’ll know exactly where you stand financially and can take steps to improve. This monthly “reality check” is necessary to spot errors and also so you can make fine course corrections as you steer the financial ship of your business.

3 – Review financial reports quarterly to get a snapshot of your company’s financial health, and perform financial forecasting as needed. – Quarterly cash flow reports, balance sheets and profit-and-loss statements give you a clear view of how your company is doing – and how you might improve. With a part-time outsourced bookkeeper and financial controller helping, you’ll receive up-to-date reports quarterly and have help analyzing the information in these reports so you can take actions that will benefit your company.

Financial forecasts might be needed quarterly, annually, or whenever your company is preparing to introduce a new product to market.

These are just a few of the processes an outsourced bookkeeping staff can perform to keep your company on the right financial track, improve profitability, and provide you with the peace of mind you need as a business owner.

Robert Kiyosaki, author of this text entitled Increase Your Financial IQ is an investor, entrepreneur and educator whose perspectives on money and investing align with conventional wisdom. Kiyosaki has challenged and changed the way many people around the world think about money.

Born and raised in Hawaii, this financial expert is a fourth-generation Japanese-American. After graduating from college in New York, Kiyosaki joined the Marine Corps and served in Vietnam as an officer and helicopter gunship pilot.

On the question of whether money makes one rich, this author says it is not so. He explains that money alone does not make one rich, adding that we all know people who go to work every day, work for money, make more money, but fail to become richer.

This financial expert asserts that ironically, many only grow deeper in debt with the money they earn. Kiyosaki says we have all heard stories of lottery winners, instant millionaires, who are instantly poor again. He adds that again, we have heard stories of real estate going into foreclosure, and instead of making homeowners richer, more financially secure, real estate drives homeowners out of their homes and into the poorhouse.

Kiyosaki says many of us know of individuals who have lost money investing in the stock market. He educates that even investing in gold, the world’s only real money, can cost investors money.

According to him, this text is not a get-rich one or a text about some financial magic formula. Rather, he says it is about increasing your financial intelligence, your financial IQ. It is about getting richer by getting smarter and the five basic forms of financial intelligence required to grow richer, regardless of what the economy, stocks, or real estate markets are doing, reveals this author.

Structurally, this text is segmented into ten chapters. Chapter one is interrogatively entitled What is financial intelligence? In this author’s words here, “Money alone does not solve your money problems. That is why giving poor people money does not solve their money problems. In many cases, it only prolongs the problem and creates more poor people.”

Kiyosaki educates that hardwork also does not solve money problems, stressing that the world is filled with hardworking people who earn money, yet grow deeper in debt, needing to work even harder for more money.

He says education does not solve money problems, adding that the world is filled with highly educated poor people.

According to Kiyosaki, it is only financial intelligence that solves all money problems. In his words, “In simple words, financial intelligence is that part of our total intelligence we use to solve financial problems… Financial intelligence solves these and other money problems. Unfortunately, if our financial intelligence is not developed enough to solve our problems, the problems persist… Many times they get worse, causing even more money problems. For example, there are millions of people who do not have enough money set aside for retirement. If they fail to solve that problem, the problem will get worse, as they grow older and require more money for medical care.”

This author reiterates that whether or not you like it, money does not affect lifestyle and quality of life, adding that the freedom of choice that money offers can mean the difference between hitchhiking or taking bus or travelling by a private jet.

As regards difference between financial intelligence and financial IQ, he says, “Most of us know that a person with a mental IQ of 130 is supposedly smarter than a person with an IQ of 95. The same parallels can be drawn with financial IQ. You can be the equivalent of a moron when it comes to financial intelligence… Financial intelligence is that part of our mental intelligence we use to solve our financial problems. Financial IQ is the measurement of that intelligence. It is how we quantify our financial intelligence. For example, if I earn $100,000 and pay 20 per cent in taxes, I have a higher financial IQ than someone who earns $100,000 and pays 50 per cent.”

Kiyosaki explains that in this example, the person who earns a net of $80,000 after taxes has a higher financial IQ than the person who earns a net of $50,000 after taxes. Both have financial intelligence, but the one that keeps more money has a higher financial IQ, educates this expert.

In chapters three to seven, the five financial IQs already discussed in chapter two, are elaborately examined respectively.

Chapter eight is christened The integrity of money. According to Kiyosaki here, “‘Integrity’ is an interesting word. I have heard it used in many different ways and in different contexts. I believe it is one of the more misused, confused, and abused words in the English language. Many times I have heard someone say, ‘He has no integrity’, or ‘If they had any integrity, they would be more successful’. Someone else might say, ‘That house has integrity of design’.”

This author says before discussing the integrity of money, it is necessary to define Integrity. Kiyosaki says “Integrity”, according to Webster, can be defined as “Soundness” (an unimpaired condition); “Incorruptibility” (firm adherence to a code of especially moral or artistic values) and “Completeness” (the quality or state of being complete or undivided).

This expert educates that just as health can break down from a literal lack of integrity, so can wealth be compromised by lack of integrity. “Instead of disease or death, which comes from a breakdown in the body’s integrity, symptoms of a lack of financial integrity are low income, crippling taxes, high expenses, excessive debt, bankruptcy, foreclosure, increased crime, violence, sadness, and despair,” expatiates this author.

He says the integrity of all the five financial IQs is needed to grow rich, stay rich and pass wealth on to generations after you. Kiyosaki asserts that missing one or more of the financial IQs is like someone who does not know how to drive attempting to drive a car that has brakes without pads, and water in the gas line.

In this author’s words, “When a person is struggling financially, one or more of these financial intelligences is out of whack, financial integrity is not sound, and the person is not complete. For example, I have a friend who earns a lot of money as a manager of a small business. Her problem is she has no protection against taxes, plus she does not budget wells, spends impulsively to buy clothes and goes up in price. She gets her financial advice from her husband and his (the husband’s) financial planner.”

In chapters nine and ten, this author beams his intellectual searchlight on the concepts of developing your financial genius and developing your financial IQ.

As regards style, this text is a prototype for stylistic excellence. For instance, most of the illustrations are based on the financial experiences of the author himself, thus lending credibility and conviction to the text. The language is simple and the presentation very didactic. Kiyosaki generously employs graphical embroidery to achieve visual reinforcement of readers’ understanding and make the layout of the text eye-friendly.

However, conceptual repetition is noticed in chapters three to seven where the five financial IQs already discussed in chapter two are further examined. One would have expected him to have harmonised chapters two to seven. Probably, Kiyosaki wants to create emphasis through deliberate repetition.

Also, the word “Intelligence” whose grammatical behaviour in the dictionary shows that it is an uncountable noun as reflected by the symbol “U” against it, is still used in this text in a countable way on pages 150 and 151 where we have “Intelligences”.

In spite of the few errors, this text is fantastic. It is a must-read for those who want to accomplish financial freedom and abundance through concrete financial education.

Trading in currency in other words also known as foreign exchange is the world’s largest financial market and was the area in which world’s largest financial institutions were involved. Earlier the Forex transactions were of biggest concern of the big corporate houses, however as the time changes the need for foreign currency has made its way through corporate houses to individuals who are involving in some sort of international transactions. Though the volume of transactions and the people involved in currency trading is increasing exponentially, still there is an information asymmetry between the investors and the market. Thus, to mitigate the information asymmetry and to provide the individual investor all the required information, let’s look at few basic things need to be paid attention,

• Currency trading market Vs other markets: All the other markets in the entire world are having a regulating authority who keeps a note of every transaction happening within their vicinity. But in case of the currency market, there is no such regulating authority or mediator who keeps a check of all the transactions. Transactions between parties happen through pre-arranged credit agreements. These ad-hoc arrangements are known for providing liquidity requirements of the institutions and individuals.

• Immateriality: Trading in currency market literally doesn’t involve any kind of physical transfer. All the transactions happen online without any involvement of physical currency. All the gains and losses are calculated and netted in respective currency accounts.

• Intermediation: In the currency market, there is no formal intermediation due to which there is no place for any sort of broker or agent. As there are no intermediaries there is no question of commission. All the gains and losses are individualistic and are the results of one’s own deeds.

Above mentioned are the few basic aspects that are needed to be known by everyone who is participating in currency markets to mitigate the information asymmetry and to avoid the risk of loss. Besides, above as we all know the transactions in currency markets always happen in pairs of currencies. The value of the currency in pairs is decided by the purchasing power of the currency in the respective markets. There are certain pair of currencies that are considered exotic in the world’s currency market and they are,

The above-mentioned currencies are currencies of the world’s strongest economies thus making them more precious and expensive across the globe. Not only these combinations, any above currency in combination with other currencies out of this pairs trade in highest volumes in almost all the Forex markets.

Having an idea about all these basics would definitely help you in making the right choice at the right time and also equips you with all the necessary weapons through which you can avoid any kind of risks. You can even check out for the benefits of trading currency with metatrader 5 forex platform for better results.

In my recent article about investor protection and financial market size, I emphasized the world’s financial system being made up of a cluster of market-based and bank-based financial systems. I reiterated that whilst the U.S. and U.K. financial systems are predominantly market-based, that of Germany and some other European countries are bank-based. Now, whatever system is dominant in a country, market-based and bank-based systems form the main source of financial capital for investors, governments and individuals.

In other words, the interaction and integration of the two systems is what constitutes the financial systems of countries. The extent of their integration has promoted the situation where any failures or setbacks in one system permeate the other system. During the recent economic downturn, the world witnessed initially the failure of the market-based financial system of U.S. which had a spillover into the bank-based and market-based financial systems of the rest of the world. This confirmed the inseparability of market-based and bank-based financial systems and the global nature of the financial system.

Quite recently, there has been much talk about the urgent need to protect investors, customers, markets and banks with regards to both types of financial systems through government intervention. Government intervention is primarily to deal with what is called “agency” problems in finance and economics. Unfortunately, even as immaculate protection of these entities is impossible and unfeasible, inordinate protection can lead to inefficiency of the financial system, or what is called “deadweight” in economics.

Agency problems are inherent of financial system and it is not possible to completely eradicate them. Government regulations may improve transparency in the financial system and help also restore confidence in a country’s global competitiveness, but it cannot abate completely the agency problems which emanates from the discrepancy between the management’s self-interest and investors or stakeholders interest. Now, the federal government’s expansion of power through regulations into the management of a country’s financial system in order to deal with agency problems has its ramifications. The regulations may be towards the avoidance of the repeat of the financial meltdown and the rooting of potential “Madoffs”; however, care should be taken to avoid the production of “mechanical” managers and curtailing of “innovative” managers. For the proper functioning and sustainability of the world financial systems, there is the need for strong ethical moral innovative managers and not ethical moral mechanical managers. Ethical moral innovative managers are endowed with unlimited power and they would act in the interest of majority of stakeholders in the presence of external stimuli influence.

Contrarily, mechanical managers are those with limited discretion and who take decisions in response to problems based on an external stimuli or influence. As a matter of fact, mechanical managers do not have the freedom to make decisions that are in conformity with their own interests and that of the investors or stakeholders. Thus, an action plan by governments in the form of regulations should avoid providing a stringent documentation of regulations encompassing what managers, CEOs and those in higher authority should do or not do. This is because it would impede the existing deregulation in the world’s financial system.

Most importantly, the regulations should avoid telling the managers what they should do. Such an action plan has the potential proclivity towards the production of mechanical managers. Meanwhile, any government pursuit of extra transparency which is very important in a market-based bank-based systems should be applauded and commended as it would offer an appreciable level of protection for investors, markets, banks and stakeholders in general. The regulations should seek to prevent scandalous activities, promote compensation of managers tied to earnings and stock price methodology whilst preventing socialistic tendencies of government’s ultimate interest and control of the systems. Judiciously, the trajectory of government’s intervention should be towards transparency, accountability (that is better accounting disclosures) and probity to ensure sound financial practices in an atmosphere of flexibility in financial operations. Anything more than this, infringes on economic or financial freedom of the system.

The days when companies in the financial system paid huge sums to managers, CEOs without regards to earnings and stock prices are over. The future demands ethical moral innovative managers to promote transparency, accountability and probity in the financial system and to prevent a repeat of the meltdown. Now, too much legitimate power from the government can exacerbate the situation by turning innovative managers into mechanical managers. This is prevalent in most socialist and communist countries. These managers can be effective and efficient if they can collaborate with the government on the regulations whilst both parties make conscious effort to avoid the production of mechanical managers. Technically, efficiency and effectiveness is what distinguishes an innovative manager from a mechanical manager. For it is possible to be efficient without being effective and vice versa. By definition, efficiency is a measure of how well or productively resources are used to achieve a goal.

Effectiveness is a measure of the appropriateness of the goals an organizational entity is pursuing and of the degree to which the entity achieves those goals. Mechanical managers may have effectiveness because of complete subjection to governmental control but lack efficiency due to absence of creativity and innovativeness. They may operate under too much of government control and so lack the freedom to be innovative or creative. Such managers cannot reconcile organizational goals with government regulations for efficiency. Consequently, they are not able to use the resources productively to achieve organizational goals. Production of mechanical managers has often resulted in wastage of human or intellectual capital over the years in several countries.

In spite of the efficacy of ethical moral innovative manager’s positive impact on a financial system, there are associated negative dimensions. First, the setback in the government’s regulations with respect to innovative manager’s production is creation of utilitarianism-oriented systems — a system with principles that advocates for the greatest good of stakeholders — in that it supports the option that provides the highest degree of satisfaction to stakeholders. Secondly, this principle focuses on the results of our actions and not on how we achieve those results. The fact is that stakeholders have wide ranging needs and values and it is almost impossible to satisfy all these needs and values. If utilitarianism is to hold in this case then these innovative managers may be compelled to engage in unethical behaviors and decisions to attain results that seem ethical to some stakeholders (for example the government and some people of higher authority).

Thus, what is ethical is relative with regards to stakeholders. This is also analogous to a contravention of the “public choice” theory in that the government’s interest may not be the interest of the majority of stake holders. If the government seeks to regulate the financial market it would have to enact policies that are not totalitarianism-oriented but somewhere in-between egalitarianism and utilitarianism.

Egalitarianism principles advocate equality among all peoples socially, politically, economically and civil rightly. There are various forms of egalitarianism which includes gender, racial, political, economic, religious and asset-based. However, economic and asset-based egalitarianism would be of prime importance in the financial system. Egalitarianism is hard to achieve now because the economic inequality gap based on Gini coefficient analysis worldwide continues to widen due to the recession. This is also precursory that economic inequality is insurmountable in future. Though utilitarianism is dominant now, the best shot of government intervention is to produce policies that are in between the two principles. Why? Because utilitarianism has failed the system and there is the need for modification. Indeed, the recent financial meltdown is the result of utilitarian principles that have prevailed in the financial system. That is to say governments were focused on the results or positive outcome in the financial system and not on how the results were achieved. Consequently, the “smart” guys in the room took advantage of the situation and produced the worldwide financial mess.

Another underrated defect of government regulations is curtailing of financial innovation. Unfortunately, any unreasonable regulation may also create an incentive for banks or financial sectors or “gurus” to get around the regulation if it is unfavorable for business. They argue that it is financial innovation that has brought products like credit cards, debit cards, CDs, ATMs, internet billing, automatic banking transfers and determination of variable rates for transactions (mortgages, loans e.t.c). Thus, there is the tendency that government regulation that seeks to put a cap on how banks or financial institutions do business with clients would create an incentive for these institutions to act otherwise. These institutions would look for ways to get around it indirectly producing unpleasant financial innovations such as uncalled for penalties, unjustified fee charges and interest rates, bonuses and the likes whilst maintaining or declaring the needed profits. For example, one should not be exasperated if rates on ATM transactions increases as a result of a government regulated financial system.

Another example could be the conversion of fixed rates into variable rates on loans, credit cards, unjustified declaration of bonuses for managers, CEOs based on market oriented explanations. All these are forms of unpleasant financial innovations which is possible under a regulated system. The fact is that the financial institutions are constantly seeking for ways to improve services as well as earn larger profits by lowering the cost of doing business and increasing the returns from their transactions. These institutions assert that they need financial capital to support their huge investments and assets and would try to get around these regulations in order to stay in business and do that.

These developments lead to two questions. Is the world to be worried about regulations? No. Is the world to be worried about the repercussions? Yes. The world is not to be worried about regulations because it would seek to promote transparency, accountability and probity. However, the world is to be worried about the repercussions because of the response of the financial system to the government regulations if the regulations are unfavorable and most importantly infringes immensely on financial freedom and innovation of the system.

In conclusion, the government regulations should seek for transparency, accountability and probity and not an imposition of stringent measures on the financial system. The government should redefine these terms of transparency, accountability and probity for the sector without inhibiting favorable financial innovation or creating an incentive for unpleasant financial innovations. Redefining transparency, accountability and probity should produce a documentation of guidelines and regulations established by consensus. Such redefinition would cause the financial sector to be cautious in their transactions knowing that at the end of the day transparency, accountability and probity would have to be met. There is the tendency for collusion with contention resulting in a situation that forces the two parties into what is called “Nash equilibrium” in economics where there is an incentive for one party to default. In this wise, the documentation should include a frame work that prohibits contention and promotes collusion besides any unwanted spillovers to stakeholders. Let’s not forget the proverbial saying that “when two elephants fight, it is the grass and the ground that suffers.”

In this age of “information overload,” many Americans possess the knowledge to develop and maintain successful financial lives. Through a quick online Google search or by listening to so-called “financial talking heads,” Americans have access to split-second information to answer most any financial question. Yet regardless of easy access to financially sound advice, many are burdened with crippling debt, habitual overspending, and scarce savings. Perhaps the more recent financial ills of Americans may be attributed to the following financial choices made by consumers: (1) The lack of a monthly budget manifests into reactive buying habits instead of proactive spending habits. Put more succinctly, the average consumer might say, “Money just slips through my fingers and I don’t know where it all goes.” (2) Easy money through savvy financial marketing of credit offers facilitates unaffordable buying power. It’s also likely not an accident, that we have all grown accustomed to being referred to as “consumers.” It begs the question: Why are we not referred to as “savers” or “investors?” The very connotation of the term “consumer” assumes that Americans will buy and spend and not restrain and save. Since the main-stream American has easy access to information pertaining to sound financial choices, yet so many have not followed these principles, an apparent disconnect appears to exist between financial knowledge and the application of that knowledge into every-day financial lives. So it would appear that Americans perhaps suffer from a case of too much information and too little financial education. As an example, read about John, an 18-year old who is ready to depart for college.

Like many teenagers, John’s primary financial education has been nearly non-existent in the school classroom. Rather, John’s financial education has been shaped through marketing advertisements from print, online, and television media-which has bombarded him with messages of affording the unaffordable through so-called “easy” financial terms. Our story begins with John on-track to graduate with honors from high school. He is accepted to several colleges but forgoes a full in-state scholarship to attend his out-of-state choice, UNC Chapel Hill. To afford his dream college, John takes out $12,000/year in subsidized student loans. In his eyes, John’s choice was quite simple: He could stay close to home to go to college or attend his dream college at UNC Chapel Hill. Because of easy access to extreme amounts of student loan debt, John’s unaffordable dream is transformed into reality. And because the acquisition of debt is made so easy through student loan programs, the debt is not a major deciding factor in John’s choice. Before John leaves for college, he also buys a new car. The easy financing offer includes 72-month financing and no money down. His Dad cosigns the loan and Dad’s rationale is that he is helping John “establish credit.” In 4 years, John graduates from UNC Chapel Hill and his debt total is $58,000 ($48,000 from student loan debt and $10,000 remaining on car loan). John is keenly aware of his debt load and he also knows that his student loan repayment will begin promptly 6 months after graduation. So needless to say, he looks forward to his first paycheck.

Through his connections at UNC Chapel Hill, John lands a good first job but his excitement is turned to shock when he looks at his first paycheck. He takes the paystub to H.R. and asks, “Who is FICA and what did he do with my money!” Regardless of the hard lesson in taxes, John is excited to have his own money and he wants his apartment to look good. John visits the local furniture store and charges $3,000 to the store credit card-which promises 12 months “same as cash.” John has also grown tired of his “college car” and decides to trade it in for a new one. He learns what it means to be “upside down” when he goes to trade-in his college car but through the liberal financing terms of the dealership, he’s permitted to roll the negative equity of his trade into the new car loan. Whereas many of John’s financial decisions to this point have resulted in debt, John realizes that he needs to save some money as well. So he’s quite happy to learn that his company offers a matching contribution through a 401k plan. John signs-up and feels good that he’s saving money for the future and getting “free money” in the way of a company match.

But 6 months after graduation, the bills come due. John is faced with starting student loan repayments but in order to keep the payments low and afford his auto and credit card payments, John chooses the interest-only option, as advertised by the student loan company. The result of all this debt spending is that in only 4-5 years following high school, John’s financial condition is quite poor. But life seems fine to him-thanks in large part to the promise of easy financing of an unaffordable lifestyle.

Our story continues as John meets Mary, the girl of his dreams. They quickly fall in love and decide to get married. Rings and the honeymoon are bought on credit as the parents pay for the wedding (by taking out a loan on their own 401k plans). John and Mary also find the house of their dreams and are happy to learn that the financial terms of the mortgage company include no down payment. Even the closing costs are rolled into the mortgage-meaning John and Mary won’t even have to write a single check to move into their dream home. With their incomes stretched paper-thin, John and Mary decide to temporarily opt out of their health insurance plans. They plan to restart their health plans when their income increases from expected salary raises. With the accumulation of a mortgage payment, student loan repayments, credit card bills, and car payments, John and Mary begin arguing over their finances. Unable to afford all their minimum payments, John cashes-out his 401k but he elects not to have any taxes withheld upon withdrawal (401k withdrawals are subject to taxes and a 10% IRS penalty). When he files his tax return, he doesn’t have the money to pay the taxes and penalties. And to top it all off, Mary has news for him. She’s pregnant.

After reading John and Mary’s financial plight, this story may sound quite familiar as many stories have been written of homeowners who have been foreclosed or been forced into bankruptcy. And these occurrences were magnified during the Great Recession. The overuse of easy financing facilitates an unaffordable standard of living. And this “house of cards” easily crumbles through financial emergencies such as job loss. As mentioned earlier, it would appear that a lack of financial education, not financial knowledge is at least partly to blame for financial challenges faced by our young couple, John and Mary.

With the apparent need for financial education in our country, a man by the name of Dave Ramsey has heeded the call through his solution, known as Financial Peace University (FPU). FPU consists of a 13-week class taught through churches and community centers across the country. And the most important elements of the FPU class focuses on Dave Ramsey’s 7 baby steps. The following is a brief summary of the 7 baby steps taught through Dave Ramsey’s FPU class. But this summary is no substitute for attending FPU, which is highly encouraged.

Baby step 1 recommends a $1,000 savings for an emergency fund. This first baby step is the most important in my view. It represents a “line drawn in the sand.” It is a conscience decision to recognize that financial emergencies will occur again. Yet, with a $1,000 saved for emergencies, the emergencies perhaps won’t seem as pressing. Perhaps even more important, Dave Ramsey encourages the development of a preliminary, first-time budget. And he recognizes that the first-time budget is likely to fail. But through trial and error, he emphatically addresses the need to create a budget in order to faithfully plan how to spend and account for every dollar before pay-day arrives. Through diligent trial and error, Dave will encourage you to review the budget every month, especially between married couples. This type of systematic planning may eliminate many arguments over money-because both partners must first agree on the budget each and every month.

Baby step 2 recommends debt pay off using the “debt snowball.” This baby step constitutes several commitments. As the old saying goes, “If you find yourself in a hole, stop digging.” Regarding credit card debt, consider for a moment that your plastic credit cards symbolize the spade on the end of a shovel. Every time you use credit cards, that shovel digs a deeper financial hole. The solution is simple, but many resist this solution. Dave recommends that you cut up your credit cards. That’s how you “throw away the shovel” and stop the madness of digging a deeper financial hole. Dave believes that until you’ve made this commitment, your steps to financial peace will be made in vain. I agree that this concept may seem radical to some, and also, some “talking heads” are adamantly opposed to eliminating the use of credit cards. But it’s hard to argue with the sound financial principle that if you can’t afford something, you shouldn’t buy it. Eliminating credit cards and so-called “easy credit” offers from your financial life also eliminates the tool that facilitates an unaffordable lifestyle. Once you have cut-up credit cards, Dave then encourages you to begin your “debt snowball.” The debt snowball concept recommends that you pay off the lowest balance first. And once you have eliminated one debt, apply that payment to the next debt in order to pay it off more quickly. Through his FPU class, Dave claims that the average family eliminates $5,300 in debt while building $2,700 in savings (Source: Dave Ramsey’s Financial Peace University class). At the successful completion of the debt snowball (all non-mortgage debt paid off), Dave Ramsey encourages the use of an envelope system for your daily spending. So if you follow his teaching, your everyday spending should consist of: cash, automatic payments (for monthly bills) debited from your checking account, and lastly, a debit card.

Baby step 3 recommends saving 3-6 months of expenses. The age-old advice of saving 3-6 months of income is not a new concept. But rather than just state the obvious and leave it at that, Dave continually encourages the use of a budget in order to systematically accomplish any and all goals, including step-by-step savings to fully fund baby step 3. Regarding the 3 to 6 month question, I believe a good rule of thumb is to review the security of your employment to determine how much should constitute your emergency savings. A government job, for example, is generally more secure than a private sector job. For example, with a married couple, if the husband is a school teacher and the wife works for a technology firm, I would encourage them to split the difference and work to save the equivalent of 4 months of household expenses.

Baby step 4 recommends investing 15% of income into Roth IRAs and Pre-Tax Retirement Plans. This is where investing with a financial professional may be most advantageous. For some financial advisors, being assigned the #4 priority through Dave’s FPU class might not sit well. But it makes good sense. I’ve learned that long-term investment accounts such as 401ks and IRAs are raided when clients fail to save sufficiently for emergencies. But if baby steps 1-3 were fully implemented, then long-term investing using retirement accounts might better serve its purpose. I won’t spend time in this article detailing why Dave Ramsey encourages Roth IRA and Pre-Tax retirement plan investing, but I fully agree with this point and I’ve advised clients on this type of investing for my entire career. So rest assured that the benefits of retirement account investing affords tax advantages that may be financially beneficial to the investor.

Baby step 5 focuses on college funding. It’s quite important that college funding by parents/grandparents is ranked below other vital financial priorities. But it goes against the grain when compared to the media messages that are conveyed. Even colleges have a formula which dictates to parents how much they are “expected” to contribute to their children’s college education. So according to Dave, college funding may commence only upon successfully completing baby steps 1-4, and no sooner. On that note, there are several different investment account types designed for college funding, including the Coverdell Educational Savings Account (ESA), Uniform Transfer to Minors Act (UTMA), and 529 College Savings Plans. Each account type has advantages and disadvantages and prior to opening any of these type of accounts, a conversation with your Financial Advisor and CPA is warranted.

Baby step 6 recommends paying off your home early. With baby steps 1-5 fully implemented, it’s time to increase payments and pay off your home early. Also, if you find yourself in a 30-year loan, consider refinancing to a 15-year loan. With lower interest rates, you might be surprised to learn that the payments are not that much more expensive. And the interest savings for a 15-year loan vs. a 30-year loan can be substantial.

Baby step 7 states to build wealth and give. Wouldn’t it be rewarding to give more money to your favorite charities? Perhaps you have a loved one that was saved by the caring hands of a medical provider and you would like to offer your financial support for future families. Personally, my family will be forever indebted to the folks at the NICU at Northside Hospital in Atlanta for the love and care they provided to my daughter, who was born prematurely. Most every one of us has a similar story or passion. But there are simple needs as well. Do you enjoy the service of a long-time waitress from your favorite coffee spot-like the Waffle House? Imagine dropping a $100 tip to that sweet waitress who always warms your cup without asking. It would be worth the $100 tip just to see her surprise. Although we can give regardless of our financial position, it takes wealth in order to make generous and life-changing gifts to churches, hospitals, and other charities. But once you progress past baby step 6, your finances should permit you to “live like no one else, so that you can give like no one else” (Quote by Dave Ramsey through Financial Peace University class videos).

It is my hope that this summary of Dave Ramsey’s 7 baby steps will lead the reader to seek out financial education through Financial Peace University. I am a volunteer class leader of FPU through my church and I’m not compensated by FPU or Dave Ramsey. My motivation for this article is that more Americans will enroll in FPU and improve their financial lives for themselves, their family, and future generations to come. To learn more about FPU and Dave Ramsey, please visit their website at: www.DaveRamsey.com.

Dave Ramsey is not affiliated with nor endorsed by John Colegrove or LPL Financial.

While it is not necessary to be a qualified accountant to design a Strategy for Sales Perfection, a basic understanding of what is involved in financial analysis is essential for anyone in sales and marketing. It is too enticing, and often too easy, to use “blue skies” thinking in planning sales and marketing activities. It is even easier to spend money without fully realizing the return one is getting for it. It is critical that sales and marketing executives be more disciplined and analytical in the way they go about planning, executing and evaluating the sales and marketing plans and strategy. One way of introducing more discipline into the process is by having a basic understanding of the financial implications of decision making, and how financial measures can be used to monitor and control marketing operations. The purpose of this text is to provide exactly that, and the first chapter deals basically with an introduction to the activities involved in financial analysis.

The Income Statement

The P&L (profit and loss) statement otherwise known as the income statement is illustrated below. This is an abbreviated version as most income statements contain much more detail, for example, expenses are typically listed based on their individual.

G/L ledger account:

The income statement measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. The income statement is also known as the “profit and loss statement” or “statement of revenue and expense.”

Sales – These are defined as total sales (revenues) during the accounting period. Remember these sales are net of returns, allowances and discounts.

Discounts – these are discounts earned by customers for paying their bills on tie to your company.

Cost of Goods Sold (COGS) – These are all the direct costs that are related to the product or rendered service sold and recorded during the accounting period.

Operating expenses – These include all other expenses that are not included in COGS but are related to the operation of the business during the specified accounting period. This account is most commonly referred to as “SG&A” (sales general and administrative) and includes expenses such as sales salaries, payroll taxes, administrative salaries, support salaries, and insurance. Material handling expenses are commonly warehousing costs, maintenance, administrative office expenses (rent, computers, accounting fees, legal fees). It is also common practice to designate a separation of expense allocation for marketing and variable selling (travel and entertainment).

EBITDA – earnings before income tax, depreciation and amortization. This is reported as income from operations.

Other revenues & expenses – These are all non-operating expenses such as interest earned on cash or interest paid on loans.

Income taxes – This account is a provision for income taxes for reporting purposes.

The Components of Net Income:

Operating income from continuing operations – This comprises all revenues net of returns, allowances and discounts, less the cost and expenses related to the generation of these revenues. The costs deducted from revenues are typically the COGS and SG&A expenses.

Recurring income before interest and taxes from continuing operations – In addition to operating income from continuing operations, this component includes all other income, such as investment income from unconsolidated subsidiaries and/or other investments and gains (or losses) from the sale of assets. To be included in this category, these items must be recurring in nature. This component is generally considered to be the best predictor of future earnings. However, non-cash expenses such as depreciation and amortization are not assumed to be good indicators of future capital expenditures. Since this component does not take into account the capital structure of the company (use of debt), it is also used to value similar companies.

Recurring (pre-tax) income from continuing operations – This component takes the company’s financial structure into consideration as it deducts interest expenses.

Pre-tax earnings from continuing operations – Included in this category are items that are either unusual or infrequent in nature but cannot be both. Examples are an employee-separation cost, plant shutdown, impairments, write-offs, write-downs, integration expenses, etc.

Net income from continuing operations – This component takes into account the impact of taxes from continuing operations.

Non-Recurring Items:

Discontinued operations, extraordinary items and accounting changes are all reported as separate items in the income statement. They are all reported net of taxes and below the tax line, and are not included in income from continuing operations. In some cases, earlier income statements and balance sheets have to be adjusted to reflect changes.

Income (or expense) from discontinued operations – This component is related to income (or expense) generated due to the shutdown of one or more divisions or operations (plants). These events need to be isolated so they do not inflate or deflate the company’s future earning potential. This type of nonrecurring occurrence also has a nonrecurring tax implication and, as a result of the tax implication, should not be included in the income tax expense used to calculate net income from continuing operations. That is why this income (or expense) is always reported net of taxes. The same is true for extraordinary items and cumulative effect of accounting changes (see below).

Extraordinary items – This component relates to items that are both unusual and infrequent in nature. That means it is a one-time gain or loss that is not expected to occur in the future. An example is environmental remediation.

The Balance Sheet

The balance sheet provides information on what the company owns (its assets), what it owes (its liabilities) and the value of the business to its stockholders (the shareholders’ equity) as of a specific date. It is called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders’ equity).

Assets are economic resources that are expected to produce economic benefits for their owner.

Liabilities are obligations the company has to outside parties. Liabilities represent others’ rights to the company’s money or services. Examples include bank loans, debts to suppliers and debts to employees.

Shareholders’ equity is the value of a business to its owners after all of its obligations have been met. This net worth belongs to the owners. Shareholders’ equity generally reflects the amount of capital the owners have invested, plus any profits generated that were subsequently reinvested in the company.

The balance sheet must follow the following formula:

Total Assets = Total Liabilities + Shareholders’ Equity

Each of the three segments of the balance sheet will have many accounts within it that document the value of each segment. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates the differences between varying types of businesses.

Current Assets – These are assets that may be converted into cash, sold or consumed within a year or less. These usually include:

Cash – This is what the company has in cash in the bank. Cash is reported at its market value at the reporting date in the respective currency in which the financials are prepared. Different cash denominations are converted at the market conversion rate.

Marketable securities (short-term investments) – These can be both equity and/or debt securities for which a ready market exists. Furthermore, management expects to sell these investments within one year’s time. These short-term investments are reported at their market value.

Accounts receivable – This represents the money that is owed to the company for the goods and services it has provided to customers on credit. Every business has customers that will not pay for the products or services the company has provided. Management must estimate which customers are unlikely to pay and create an account called allowance for doubtful accounts. Variations in this account will impact the reported sales on the income statement. Accounts receivable reported on the balance sheet are net of their realizable value (reduced by allowance for doubtful accounts).

Notes receivable – This account is similar in nature to accounts receivable but it is supported by more formal agreements such as a “promissory notes” (usually a short-term loan that carries interest). Furthermore, the maturity of notes receivable is generally longer than accounts receivable but less than a year. Notes receivable is reported at its net realizable value (the amount that will be collected).

Inventory – This represents raw materials and items that are available for sale or are in the process of being made ready for sale. These items can be valued individually by several different means, including at cost or current market value, and collectively by FIFO (first in, first out), LIFO (last in, first out) or average-cost method. Inventory is valued at the lower of the cost or market price to preclude overstating earnings and assets.

Prepaid expenses – These are payments that have been made for services that the company expects to receive in the near future. Typical prepaid expenses include rent, insurance premiums and taxes. These expenses are valued at their original (or historical) cost.

Long-Term assets – These are assets that may not be converted into cash, sold or consumed within a year or less. The heading “Long-Term Assets” is usually not displayed on a company’s consolidated balance sheet. However, all items that are not included in current assets are considered long-term assets. These are:

Investments – These are investments that management does not expect to sell within the year. These investments can include bonds, common stock, long-term notes, investments in tangible fixed assets not currently used in operations (such as land held for speculation) and investments set aside in special funds, such as sinking funds, pension funds and plan-expansion funds. These long-term investments are reported at their historical cost or market value on the balance sheet.

Fixed assets – These are durable physical properties used in operations that have a useful life longer than one year.

This includes: Machinery and equipment – This category represents the total machinery, equipment and furniture used in the company’s operations. These assets are reported at their historical cost less accumulated depreciation.

Buildings or Plants – These are buildings that the company uses for its operations. These assets are depreciated and are reported at historical cost less accumulated depreciation.

Land – The land owned by the company on which the company’s buildings or plants are sitting on. Land is valued at historical cost and is not depreciable under U.S. GAAP (generally accepted accounting principles).

Other assets – This is a special classification for unusual items that cannot be included in one of the other asset categories. Examples include deferred charges (long-term prepaid expenses), non-current receivables and advances to subsidiaries.

Intangible assets – These are assets that lack physical substance but provide economic rights and advantages: patents, franchises, copyrights, goodwill, trademarks and organization costs. These assets have a high degree of uncertainty in regard to whether future benefits will be realized. They are reported at historical cost net of accumulated depreciation.

Current liabilities – These are debts that are due to be paid within one year or the operating cycle, whichever is longer. Such obligations will typically involve the use of current assets, the creation of another current liability or the providing of some service.

Bank indebtedness – This amount is owed to the bank in the short term, such as a bank line of credit.

Accounts payable – This amount is owed to suppliers for products and services that are delivered but not paid for.

Wages payable (salaries), rent, tax and utilities – This amount is payable to employees, landlords, government and others.

Accrued liabilities (accrued expenses) – These liabilities arise because an expense occurs in a period prior to the related cash payment. This accounting term is usually used as an all-encompassing term that includes customer prepayments, dividends payables and wages payables, among others.

Notes payable (short-term loans) – This is an amount that the company owes to a creditor, and it usually carries an interest expense.

Unearned revenues (customer prepayments) – These are payments received by customers for products and services the company has not delivered or for which the company has not yet started to incur any cost for delivery.

Dividends payable – This occurs as a company declares a dividend but has not yet paid it out to its owners.

Current portion of long-term debt – The currently maturing portion of the long-term debt is classified as a current liability. Theoretically, any related premium or discount should also be reclassified as a current liability.

Current portion of capital-lease obligation – This is the portion of a long-term capital lease that is due within the next year.

Long-term Liabilities – These are obligations that are reasonably expected to be liquidated at some date beyond one year or one operating cycle. Long-term obligations are reported as the present value of all future cash payments. Usually included are:

Notes payables – This is an amount the company owes to a creditor, which usually carries an interest expense.

Long-term debt (bonds payable) – This is long-term debt net of current portion.

Deferred income tax liability – GAAP (generally accepted accounting principles) allows management to use different accounting principles and/or methods for reporting purposes than it uses for corporate tax fillings to the IRS. Deferred tax liabilities are taxes due in the future (future cash outflow for taxes payable) on income that has already been recognized for the books. In effect, although the company has already recognized the income on its books, the IRS lets it pay the taxes later due to the timing difference. If a company’s tax expense is greater than its tax payable, then the company has created a future tax liability (the inverse would be accounted for as a deferred tax asset).

Pension fund liability – This is a company’s obligation to pay its past and current employees’ post-retirement benefits; they are expected to materialize when the employees take their retirement for structures like a defined-benefit plan. This amount is valued by actuaries and represents the estimated present value of future pension expense, compared to the current value of the pension fund. The pension fund liability represents the additional amount the company will have to contribute to the current pension fund to meet future obligations.

Long-term capital-lease obligation – This is a written agreement under which a property owner allows a tenant to use and rent the property for a specified period of time. Long-term capital-lease obligations are net of current portion.

Statement of Cash Flow

The statement of cash flow reports the impact of a firm’s operating, investing and financial activities on cash flows over an accounting period.

The cash flow statement shows the following:

How the company obtains and spends cash

Why there may be differences between net income and cash flows

If the company generates enough cash from operation to sustain the business

If the company generates enough cash to pay off existing debts as they mature

If the company has enough cash to take advantage of new investment opportunities

Segregation of Cash Flows

The statement of cash flows is segregated into three sections: Operations, investing, and financing.

Cash Flow from Operating Activities (CFO) – CFO is cash flow that arises from normal operations such as revenues and cash operating expenses net of taxes. These include:

Cash inflow: is the positive influx of funds from (1) positive revenue from sale of goods or services (2) interest from indebtedness and (3) dividends from investments.

Cash outflow: is the negative (payments) most commonly categorized as (1) Payments to suppliers (2) payments to employees (3) payments to the government (4) payment to lenders (5) payment for other expenses.

Cash Flow from Investing Activities (CFI) – CFI is cash flow that arises from investment activities such as the acquisition or disposition of current and fixed assets. These include:

Cash inflow is the receipt of cash from (1) the sale or disposition of property, plant or equipment (2) the sale of debt or equity securities or (3) lending income to other entities.

Cash outflow is the payment of (1) the purchase of property plant and equipment, (2) purchase of debt or other equity securities, or (3) lending to other entities,

Cash flow from financing activities (CFF) – CFF is cash flow that arises from raising (or decreasing) cash through the issuance (or retraction) of additional shares, or through short-term or long-term debt for the company’s operations.

Financial Statement Analysis

Vertical Analysis

Analyzing a single period financial statement works well with vertical analysis. On the income statement, percentages represent the correlation of each separate account to net sales. Express all accounts other than net sales as a percentage of net sales. Net income represents the percentage of net sales not used on expenses. For example, if expenses total 69 percent of net sales, net income represents the remaining 31 percent. Vertical analysis performed on balance sheets uses total assets and total liabilities for comparison of individual balance sheet accounts.

Horizontal Analysis

Horizontal analysis is the comparison of data sets for two periods. Financial statements users review the change in data much like an indicator. Optimistic analysts look for growth in revenue, net income and assets in addition to reductions in expenses and liabilities. Calculating absolute dollar changes requires the user to subtract the base figure from the current figure. Expressing changes with percentages requires the user to divide the base figure by the current figure, and multiply by 100.

Trend Analysis

Review of three or more financial statement periods typically represents trend analysis, a continuation of horizontal analysis. The base year represents the earliest year in the data set. Although dollars can represent subsequent periods, analysts commonly use percentages for comparability purposes. Users review statements for patterns of incremental change representing changes in the business in questions. Financial statement improvements include increased income and decreased expenses.

Ratio Analysis

Ratios express a relationship between two more financial statement totals, and compare to budgets and industry benchmarks. Five common categories of ratios exist: liquidity, asset turnover, leverage, profitability and solvency. Reviewing ratios for performance compared with prior periods or industry specific benchmarks provides financial statements users with recognition of strengths and weaknesses.

Limitations

Analyzing financial statements presents an opportunity for reviewing past data and possibly budgets. However, the data used is historical in nature, indicating it may not be a good representation of the future due to unforeseeable circumstances. Market value of assets and liabilities can be under or overstated significantly leaving statement users unaware of the real value of a balance sheet. Pro forma statements, or forward-looking financial statements, provide estimates at best resulting in speculation.

Cost-Volume-Profit

Cost-volume-profit analysis provides owners and managers with an understanding of the relationship between fixed and variable costs, volume of products manufactured or sold and the profit resulting from sales. The financial relationship includes contribution margin analysis, break-even analysis and operational leverage. Financial statements provide the data to perform cost-volume-profit analysis.

Contribution Margin

Contribution margin analysis allows managers to look at the percentage of each sales dollar remaining after payment of variable costs, including cost of goods, commissions and delivery charges. Managers and owners use this analysis to help determine the pricing, mix, introduction and removal of products. Contribution margin analysis also aids managers with determining how much incentive to use for sales commissions and bonuses. Comparing each product offered affords the opportunity to look at product profitability and product mix.

Break-even

Break-even analysis considers the sales volume at which fixed and variable costs are even. Owners and managers must consider two primary figures when calculating the break-even. First, gross profit margin, which is the percentage of sales remaining after payment of variable costs. And fixed costs, including administration, office and marketing. Financial statements provide both sets of data necessary to calculate the break-even volume.

Operational Leverage

Every business model contains slightly different operating leverage, which compares the amount of fixed costs to sales. Businesses with higher fixed costs will experience a larger multiplier in their operating leverage, indicating less sales growth results in more profit. However, the same is true for losses, where small reductions in sales exponentially increase net losses. Less operating leverage results in less growth of net income.

Financial Ratios

A financial ratio expresses a mathematical relationship between two or more sets of financial statement data and commonly exhibits the relationship as a percentage. Profitability, solvency, leverage, asset turnover and liquidity comprise the five standard ratio categories. Managers and owners should review the ratios period over period, determining where unfavorable trends exist. After reviewing trends, benchmark ratios against industry standards, which managers can acquire from a variety of sources including industry-specific organizations.

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise’s financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm’s creditors.

Ratios can be used to judge the organization’s “liquidity”, i.e. can it pay its bills, its “leverage”, i.e. how is it financed and its “activities”, i.e. the productivity and efficiency of the organization. Taking liquidity analysis only, this has a bearing on new product planning, marketing budgets and the marketing decisions.

Financial analysis can be used to serve many purposes in an organization but in the area of marketing it has four main functions:

Gauge how well marketing strategy is working (situation analysis)

Evaluate marketing decision alternatives

Develop plans for the future

Control activities on a short term or-day to-day basis.

Understanding a company’s financial performance is critical to developing a solid Strategy for Sales Perfection as well as being an educated and well informed company executive. The purpose of this discussion is to introduce you to the concepts and points of analyzing financial statements and using ratios to develop informed business decisions. The information discussed in this chapter in no way will substitute the job function of your CFO or your CPA.

Financial statements can be quite complex and accounting principles may have significant effect on the way they are reported. Understand that a coordinated dialogue with your accounting staff is critical to obtain clear and concise knowledge of your company financial statements. Financial ratios have limitations and specific uses if interpreted properly. Attention should be given to the following issues when using financial ratios:

A reference point is needed. To be meaningful most ratios must be compared to historical values of the same firm, your company forecasts, or ratios with similar companies.

Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to draw on a conclusion of the purpose of the analysis.

Take into account seasonal factors and business cycles when using financial ratios. Average values should be used when they are available.

Communicate with your accounting department to understand their philosophy and accounting principles.

Sales and Profit Ratio Model

Several profit models have been introduced over the years to gauge the performance of a company and to build a statistical measure to peak performance. We have developed a very simple model that measures four critical areas of performance: gross profit margin %, net profit margin %, RONA – return on net assets, and GMROI – gross margin return on inventory. Earlier in the chapter, we introduced a set of financial statements of which we will use the data from those as part of our illustration of the Sales and profit model.

This model can be set up in an excel spreadsheet to keep track and measure the company’s progress in attaining peak sales performance; monthly tracking should be supported to insure constant improvements. These four ratios are the best measure of a company’s overall sales performance and should be compared to others in your industry to attain top performance standards.

Gross Margin Return on Inventory (GMROI) is a “turn and earn” metric that measures inventory performance based on both margin and inventory turnover. In essence, GMROI answers the question, “For every dollar carried in inventory, how much is earned in gross profit?” GMROI can be calculated at the organization level and, if the proper data is collected at the item level, all the way down to an individual item.

To set a benchmark for the organization, use either current financial statements or budgets for the future. Calculate the GP %, ITO and compute the existing or target GMROI. Measure every appropriate segment against this target. You will identify groups that are exceeding the targets and also those that are not pulling their own weight. While most organizations have some “loss leaders”, it is important to understand which items/groups that are under-performing. Choices are to live with the performance, improve the margin, improve the turnover or in extreme cases, discontinue the poor performing product.

Break-Even Profit Analysis

In business and economics, break-even analysis is a commonly used practice to set pricing multiples or price indexes. Companies need to use break even analysis to determine many relevant factors when designing a strategy for sales perfection. In the linear “cost-volume profit analysis”, the break-even point in terms of units (X) can be directly computed in terms of total revenue (TR) and total costs (TC) as:

The relationship between gross profit margins and sales revenue is approximately a 3.5 to 1 ratio. Simply stated, if you reduce your margin by 1/2 percentage point (.5%) you will need to raise your revenue by 1.7% to maintain the same amount of gross profit. Look at the table above which clearly illustrates this concept, now compare this illustration to your own company. Let’s assume your company has total revenue of $45,000,000, a reduction in margins of a half percent (0.5%) would require you to raise revenue to $48,375,000 to maintain the same amount of income. Your objective as an executive inside your company is to improve your company’s financial position.

Our website winning sales strategy and our book “Strategies for Sales Perfection: In the New Economy provide detailed analysis and explanations of this information along with a plethora of additional resources to allow your company to succeed during these this new economic recovery period.

Strategies for Sales Perfection: In the new Economy is a book written to help company executives develop a plan to support growth. to learn more visit our website at winning sales strategies.com

Earlier this year and shortly before I surrendered my Financial Services Authority permission to provide financial advice I met Bruce and Theresa, my long standing clients of some thirty years. The meeting was arranged to say farewell and to close our professional (but not social) relationship, and to finalise their plans for their retirement.

The meeting lasted for most of the day, and whilst their finances were on the agenda and were dealt with, much of the meeting revolved around how they were going to live in retirement, what they could and should do, how they were going to maintain family ties, decisions about their house and nearly all aspects of life in retirement. We also covered their relationship with money, dealing in particular with how to change their working life attitude of saving and prudence to finding the courage to spend their time and money on making the most of their lives in retirement. Whilst I was able to demonstrate mathematically that their income and assets were more than sufficient to allow them to live a fulfilled life in retirement, we had to deal with some deep emotional blocks to spending, in particular the fear that they would run out of money.

This was far more than financial advice. It amounted to ‘financial life coaching’, a relatively new professional field that treats money and life as intertwined and is truly holistic in its approach. It is an approach I started to adopt in 2006 after training with the Kinder Institute of Life Planning in the US. In truth, most of my client interventions since then have been holistic, coaching interventions. I have found that the coaching element is of far greater value to my clients than arranging financial products, which, within the context of most financial life plans, should be simple, low cost and commoditised.

Financial coaching is for everyone?

I have witnessed the impressive changes that financial life coaching can bring about in clients, and I would argue that everyone needs a life coach. In reality, the service is less suited to what Ross Honeywill and Christopher Norton call ‘Traditionals’ and more suited to what they call the ‘New Economic Order’ (NEO) (Honeywill, Ross and Norton, Christopher (2012). One hundred thirteen million markets of one. Fingerprint Strategies.), and what James Alexander and the late Robert Duvall in their research for the launch of Zopa (the first peer-to-peer lending business) called ‘Freeformers’ (Digital Thought Leaders: Robert Duvall, published by the Digital Strategy Consulting).

Two types of consumer

These distinctions are important in the context of a key concept about money, which I will cover shortly. First, lets consider the differences between the two groups. Honeywell and Norton describe ‘Traditionals’ as primarily interested in the deal, features and status. A sub-group of ‘Traditionals’ is ‘High Status Traditionals’ for whom status is the highest priority. They cite Donald Trump as the epitome of a High Status Traditional.

Honeywill and Norton contrast ‘Traditionals’ with NEOs. According to the authors, NEOs buy for authenticity, provenance, uniqueness and discovery. They are more likely to start their own business, are usually graduates, see the internet as a powerful tool for simplifying their lives, understand investing (money and personally), and are repulsed by conspicuous consumption. They are highly individual and express their own individual values through what they say, buy, do and who they do it with.

Honeywill and Norton discovered NEOs in the US and wrote about them in 2012 but Robert Duvall and James Alexander arrived at a similar concept in the UK in the early 2000s. In their research prior to launching Zopa, Duvall and Alexander identified a group of people they called ‘Freeformers’, a new type of consumer ‘defined by their values and beliefs, the choices they make, where they spend their money. They refuse to be defined by anyone, they don’t trust corporations or the state. They value authenticity in what they buy and they want to lead “authentic” lives.’ Duvall and Alexander saw these people as the core of an IT society based on self-expression, choice, freedom and individuality.

Two attitudes to money

In my own career as a financial adviser, planner and coach I have identified two prevailing attitudes to money. There are those who see money as an end in itself, and those who see money as a means to an end. I cannot admit to having carried out detailed research on this, but I have seen enough to make a reasonable assumption, namely that it is the Traditionals who see money as an end in itself, and it is the Freeformers who see money as a means to an end. (At the risk of upsetting Messrs Honeywill and Norton and conscious that NEOs and Freeformers are not exactly the same, I am going to refer to both simply as Freeformers in the rest of this paper as I feel the word is a better and more evocative description of the species than NEOs.)

In very general terms, Traditionals are intent on making their money go as far as possible by getting the best deals and features. Psychologically, they equate money with ego and status. Conversely, Freeformers use their money to achieve their individuality and authenticity and to express their values. Whilst they do not spend entirely irrespective of cost, their spending criteria are written in terms of authenticity, provenance, design, uniqueness and discovery.

Mapping attitudes to life and money

In my own experience Traditionals respond to financial advice, but not financial planning or coaching, whilst Freeformers only start to value financial advice when it is supported by an individual and unique life and financial plan born out of a deep coaching and planning process.

Putting it another way, Freeformers understand that the link between life and money goes deep, so respond well to coaching that addresses their life and money. Traditionals, on the other hand, do not harbour such a powerful connection between life and money, and are less likely to respond to the concept of ‘financial life coaching.’ Traditionals form the key market for financial services institutions and packaged products, especially those that provide deals (discounts / competitive fees), features (pension plans with flexibility, for instance) and status (high risk, high returns). Freeformers are more likely to select a platform (an online service to aggregate all their investments and tax wrappers) and concentrate on selecting investments to suit their values and goals.

The spectrum of help with personal finances

In the UK and other parts of the world you can now find many different forms of help for your personal finances. Its a wide spectrum with financial advice at one end and financial life coaching at the other. In between, families and individuals can access financial planning, guidance, training, mentoring and education. Of course none of these are mutually exclusive and some firms or organisations will provide a combination so it is important to understand what is available and the limits and benefits of each.

Financial advice

Financial advice is product oriented. In the UK the Financial Conduct Authority (FCA), which regulates personal financial advice, defines financial advice as advice to buy, sell or switch a financial product. Whilst there is a regulatory requirement to ‘know your customer’ and ensure any advice is ‘suitable’, the thrust of financial advice is the sale of products.

A financial adviser must be authorised by the FCA and abide by its rule book.

Financial planning

Financial planning goes deeper than financial advice. It aims to ascertain a client’s short, medium and long term financial goals and develop a plan to meet them. The plan should be comprehensive and holistic. It should cover all areas of the client’s personal and family finances and recommendations in any part of the plan should maintain the integrity of the plan as a whole.

The Financial Planning Standards Board (which sets the standards for the international Certified Financial Planning qualification) defines a six step financial planning process:

Establish and define the client relationship

Collect the client’s information

Analyse and assess the client’s financial status

Develop financial planning recommendations and present them to the client

Implement the financial planning recommendations

Review the client’s situation

Although one of the practices in Step 2 is to ‘Identify the client’s personal and financial objectives, needs and priorities’, the process is primarily about finance rather than life.

Certified Financial Planners must also be authorised to provide financial advice by the regulator of the country in which they operate.

We are beginning to see a number of different style here. Arguably, George Kinder and the Kinder Institute lead the field and Kinder has developed the EVOKE five step financial life planning (or simply ‘life planning’) process consisting of:

Knowledge: providing the internal and external knowledge to achieve the client’s goals

Execution: coaching the client in the execution of their plan

(Kinder, George and Galvan, Susan. Lighting the Torch: The Kinder Method of Life Planning. FPA Press 2006)

There are two important distinctions between financial planning and life planning: life planning takes as its starting point the client’s life rather than their money, and life planning contains the important middle step of dealing with obstacles, which is absent in the financial planning process.

Life planners are usually (but are not required to be) authorised financial advisers.

Financial literacy

Financial literacy is generally poor and there are a growing number of organisations and institutions in the UK dedicated to improving financial literacy. The UK Government has attempted to do this through the Money Advice Service (www.moneyadviceservice.org.UK/en) and in 2014 financial literacy education became part of the National Curriculum in England and should be a compulsory part of every school’s timetable (Long, Robert and Foster, David. Financial and enterprise education in schools. House of Commons Briefing Paper number 06156, October 2016).

Financial literacy is not financial advice or planning, and does not have to be provided by a financial adviser or planner.

Financial guidance

Financial guidance is a relatively new concept, given weight by the Financial Conduct Authority in its review of the financial advice market (HM Treasury and Financial Conduct Authority. Financial Advice Market Review Final Report. March 2016) which defines it as any form of help provided to consumers which is not regulated financial advice. The FCA sees ‘guidance’ as a way to tackle barriers to consumer access to advice, the three key barriers being affordability, accessibility and the threat of liabilities and consumer redress to advisers.

The FCA cites a number of options, including basic advice, simplified advice, streamline advice, general and generic advice and guidance. Some of these will require authorisation, others not.

Financial coaching

There does not appear to be an authoritative definition of financial coaching / financial life coaching. The International Coach Federation definition of coaching is:

Partnering with clients in a thought-provoking and creative process that inspires them to maximize their personal and professional potential.

My own definition of financial life coaching is:

Financial life coaching is a process to help a client move from where they are now to a better personal and financial position as defined by their beliefs, attitudes, values, behaviour, actions and relationship to money.

Personally, I have long believed that you cannot help people move to a better personal position without addressing their finances, and people cannot better their finances without having a clear idea of what their finances are to be used for in the short, medium and long term. I know I am not alone in this opinion. When I have talked to psychotherapists and counsellors about my work I have often been greeted with enthusiasm as so often their clients have been confounded in their best intentions by financial issues.

In practical terms, it is possible and desirable to structure the personal finances of a household so they support and advance the personal goals, values and interests of the household. However, this implies a need to understand what those goals, values and interests are.

This definition makes clear that the process is holistic in the truest sense of the word, covering our thoughts, feelings and actions, dealing with right and left brain activities and working in the entire field of a client’s life. It also deals not so much with money per se, but with our relationship to money. It is our relationship with money that defines how we use it, not how much we actually have or do not have.

Lynn Twist, a global activist committed to alleviating poverty and hunger and supporting social justice describes how the Achuar people, an indigenous group of people from deep in the Amazon rainforest have lived without money for thousands of years (Twist, Lynn (2003). The Soul of Money: Reclaiming the Wealth of our Inner Resources. WW Norton, New York). Not just lived but thrived on the social currency of reciprocity rather than the financial currency of cash.

I think we have to be careful here and not confuse ‘better’ with ‘more’. Thought leaders such as Lynn Twist and Brené Brown are adamant that scarcity (‘I don’t have enough money / time / sleep / leisure / work / kudos / friends etc) is the root cause of much of the world’s dissatisfaction. But wanting ‘more’ is different from wanting ‘better’. From a moral and ethical point of view, we arguably all have a responsibility to make better not only our own lives, but the lives of others. That, however, is very different from wanting more of anything simply for the sake of wanting more, particularly wanting more in order to stay connected to our peers.

Indeed, I see financial life coaching as a process that helps people deal with the problem of scarcity by helping them to let go of their own excessive demand for whatever commodity they think they are lacking, not by trying to increase the supply of the commodity in the first place.

Others will say that trying to ‘better’ our lives is a futile exercise, that we should just accept our situation as it is. Trying to lead a better life takes energy, is exhausting and requires so much focus on a goal or goals that we cease to be aware of the wider (and probably deeply enriching) environment around us.

The demand for financial life coaching

I built my business, Planning for Life, on the back of demand for advice that went far deeper than financial advice as defined by the FCA. Neither I nor my clients called it ‘financial coaching’. We did not even realise the term existed, but that is what I was doing.

Where did this demand come from, and does it still exist? I would argue more than ever, for many reasons.

‘Life is s**t’

I don’t actually believe this, nor do most people. However, they do recognise that ‘the more the planet is fractured, the more distress individuals feel inside’ as leadership and life coach Danielle Marchant puts it when commenting on the 2016 ICF Coaching Study (International Coaching Federation 2016 Coaching Study Executive Summary available at http://www.coachfederation.org ). This study suggests that there are now 65,000 people working globally as professional coaches, or using coaching in a management or leadership role. The distress Danielle refers to precipitates a demand for a less structured form of help than, say, skills development or financial advice. It creates a demand for someone else to talk to, to be challenged, to brainstorm ideas, to be accountable to, to find meaning in life. In particular, it precipitates a demand for help in overcoming the practical, emotional, professional and financial obstacles to a better life.

Reacting against commoditisation

Honeywill and Norton discuss this at length. They argue that the demand amongst NEOs for a more authentic, genuine, individual life is partly a reaction to the uniformity of commoditisation. Why is this important? First, because in a highly commoditised, globalised world its difficult to actually live the NEO or Freeformer lifestyle and there is a growing demand for help in achieving this. This is not just about money, it is a whole lifestyle issue and if individuals are not achieving their desired lifestyle they will seek appropriate help to get there in the form of life coaching and, by extension, financial coaching.

Second, if you hate commoditisation, you probably hate traditional financial services and look for a more individual, authentic and highly personal form of help which financial life coaching can provide. You will also want to seek help from a like minded individual who shares your ambitions and values, and probably has been through – and is prepared to admit to having been through – life’s downs as well as up. You will seek help from someone whose expertise and provenance is founded more on their own life struggles than on their technical expertise.

The search for meaning

In Western economies many people have reached the pinnacle of Maslow’s hierarchy of needs – self-actualisation. Their physiological and safety needs are met through the purchase of basic commodities. Their needs for love and belonging are met through relationships and brands. Their need for esteem is met through their work or profession. What is left? The search for self actualisation – or meaning and empathy as commentators such as Professor Rowland Smith and Bernadette Jiwa put it.

Maximising your potential or doing the best you can is a little more complicated than building a portfolio, and comes down to answering questions such as ‘Why I am here?’, ‘Who I am?’, ‘What is my purpose and relationship to the rest of the world?’. Identifying gaps and filling them is rich material to work on with a coach and is undoubtedly a key driver of the demand for coaching.

Scope

Financial life coaching has a far wider scope than financial advice. Brendan Llewellyn, a UK commentator on financial services, wrote recently of how ‘for most people, money concerns income, expenditure, borrowing and savings’. He goes on to say that, although the financial services industry concentrates on the last two, ‘for most people income and expenditure are the most important variables.’ Llewellyn goes on to talk about the need for a new type of financial adviser, a counsellor or guide who would help people increase their incomes, look at personal development and retraining, seek new employment opportunities, analyse and improve expenditure patterns.

The focus of our interventions should be on where the client really needs help, namely balancing the work / income and life / expenditure equation. In recent years another layer has been added to this: sustainability. Freeformers in particular are environmentally aware and want to live sustainably. Traditional financial services concentrates on investments and borrowing when what people need is help in controlling their cash flow, spending smarter and doing it sustainably, which is a clear role for financial coaching.

Repairing the divorce between life and money

It is my contention that over the last 30 or so years financial services have become more left brain, commoditised and productised. This has resulted in the steady separation of life and money and a shift in emphasis towards the concept of money as an end in itself, rather than a means to an end. Much financial advertising is based on returns and the efforts investment teams make to be seen as the top performing fund in a sector are phenomenal.

High early surrender and switching rates testify to the fact that financial products tend to be chosen for their short term performance rather than the long term suitability in a life plan.

However, people are beginning to see through this and I was often gratified by how many of my clients appreciated their portfolios being structured round what we term the Cascade, which recognises the pros and cons of the main financial asset classes and allocates money between them based on the client’s short, medium and long term needs for cash, rather than for the maximum returns (which also of course incorporate the maximum risk).

As long as traditional financial services continue to be driven by growth and returns it will not reconnect with life. However financial coaching, which seeks to reunite life and money and build a working personal relationship with money, can do much to repair this divorce.

Dealing with obstacles

Traditional financial services and even certified financial planning do not address the matter of obstacles to achieving a client’s goals or desired lifestyle. We only have to look at our own lives to see that our struggles are usually around dealing with practical, emotional, professional and financial obstacles to achieving a better life. Financial life coaching can fill this gap.

A natural extension

The concept of coaching is becoming more familiar in home life as well as business life. After all, we hire coaches in a number of areas today, including leadership, business, sports, health and life. Dealing with personal finances is no less challenging than, for example, staying fit or building a business and lends itself to coaching. In my experience, clients came to me for this very reason, even if they did not recognise or understand that it was financial coaching rather than financial advice that they sought.

Not the Listening Bank

It used to be said that the average length of time between the start of an adviser / client meeting and the adviser starting to sell a financial product was ninety seconds. Whether there is truth in that I don’t know. However, I do know that individuals shun financial advice because they don’t want to be the subject of a hard sell. What they want is someone to listen to them and to council them objectively and independently.

On many occasions I have sat with couples hardly saying a word, just listening to them talk to me and each other in an empathic, secure environment. At the end they would often thank me and talk about how in all their years of marriage they had never had that sort of deep and meaningful conversation.

People want to be heard, to be able to tell their stories to someone prepared to listen and help them to understand the meaning of those stories.

Go to a financial coach before a financial adviser

Financial products such as savings accounts, loans, mortgages, pensions, and investments fulfil an important part of any family’s financial plan and belong firmly in the field of expertise provided by financial advisers. So, why would you go to a financial coach first? Here are just a few reasons:

The scope of financial coaching is much wider than financial advice; ultimately it is about getting life right then building a sound framework for financial products

In spite of those financial ads that tell you a bank account or other financial product is the route to freedom, it is the deep inner journey around life and money that financial coaching will take you on that is the true source of freedom

Coaching will provide you with new ideas and new perspectives on life; you will brainstorm obstacles and assess different scenarios before committing to financial products

You will be able to make informed decisions about your life and money and minimise the probability of making serious mistakes

Your existing norms and attitudes will be challenged

Limiting beliefs and self-beliefs will be identified and addressed

Bad financial habits will be identified and addressed

You will become accountable to someone other than yourself

You will build a life based on a deep exploration and statement of your most important values

You will have the opportunity to explore how your money can be used to express your humanity and ideals, how you can make ‘contribution’ your primary driving force instead of ‘consumption’

Your relationship will be based on trust, authenticity and partnership; you will build a support team to help you on your journey

A coach will give you a highly personalised service, especially compared to the upcoming alternative of robo-advice

You will develop a financial framework that supports your life goals which you can either fill with financial products yourself or use as a brief for a financial adviser to do the work for you

Life will become simpler, different and under control and you will become financially well organised

Conclusion

By coincidence, I find myself finalising this article on Black Friday, 25th November 2016, the day after Thanksgiving Day in the USA. Print, television and online media are awash with adverts and encouragement to go out today and buy, buy, buy. I have no doubt that savings accounts and investment portfolios will be raided, credit cards and overdrafts will be pushed to the limit and for what? The chances are that much of the stuff purchased today will be used once then relegated to the back of a cupboard or attic. By the time we have got through Christmas and New Year and into January many, many people will be suffering from a monumental financial hangover.

This isn’t about money. Its about our relationship to money, our attitude to life and our deep seated hopes and fears about our lives. But these can be addressed and with guidance and coaching they can be changed to ensure people can lead more fulfilled lives in the knowledge that they are the masters of their money and not vice versa. Get to grips with life and financial relationships first, then go to a financial adviser with a clear plan and brief for your money.